Several property funds in the UK have faced challenges due to a range of external pressures. Here are some key events:

• M&G’s Decision: Last week, M&G, a renowned fund manager, announced the closure of its £565mn property fund. They plan to return cash to their clients, primarily because of the dwindling interest from retail investors.
• St James’s Place Follows: Not long after, St James’s Place suspended trading in its £829.5mn property unit trust. This decision came on the heels of a spike in redemption requests from its investors.
• Canada Life Asset Management’s Announcement: Earlier this month, another property fund operated by Canada Life Asset Management also revealed plans to shut down. Michael White, the head of UK property at the company, explained that due to increasing redemption requests, the fund was no longer commercially viable.

Not the First Time

Such events are not entirely new. Property funds in the UK have periodically faced similar challenges since 2016. Factors like increasing interest rates have recently caused a shift away from these funds. These property funds are often associated with concerns about escalating debt costs and post-pandemic office vacancies. Conversely, fixed income and cash products seem to be drawing more interest due to their perceived safety.

Issues with Open-ended Property Funds

Max Nimmo, an expert real estate analyst from stockbroker Numis, shed light on the challenges of “open-ended” property funds. Such funds allow daily transactions even though real estate, their primary asset, isn’t quickly converted to cash. Following various suspensions, the trust in these funds has been eroding.

Recent data from Morningstar reveals that the redemptions from UK property funds have remained high. Over the past year, there’s been a net monthly withdrawal ranging from £50mn to £190mn. A staggering £1.4bn has been pulled out during this period, diminishing the market’s total value.

Oli Creasey from Quilter Cheviot elaborated that continuous redemptions challenge fund managers, especially as available cash depletes. Selling easily liquidated properties first means eventually, fund managers might need to resort to offloading assets that might take longer to sell.

Global Economic Factors Impacting the Market

The commercial real estate market faces an uncertain future. Global central bankers have indicated that even if the current high-interest rates don’t increase further, they might remain elevated for a considerable period. Such an environment implies persistent high borrowing costs, which could further suppress property valuations.

Open-ended funds, despite their challenges, offer an opportunity for retail investors to venture into commercial property. This advantage has made them particularly popular in the UK.

Regulatory Involvement

The UK’s Financial Conduct Authority (FCA) mandates that in volatile market conditions, property fund managers should contemplate suspending their funds. This provision was invoked post the Brexit vote in 2016, during the pandemic in 2020, and after the recent “mini” Budget.

Given the concerns, the FCA commenced a consultation in August 2020 aiming to reduce potential risks to investors. A significant consideration is the introduction of a 90-180 day notice period for redemptions. The challenge, however, is that this could clash with regulations for “individual savings accounts” that require fund access within 30 days upon request. HMRC is currently reviewing this proposal.

Other global regulators, such as the European Central Bank, have also called for reforms, emphasizing potential risks to the broader financial stability.

Current State for Investors

Unfortunately, for some investors, these protective measures might seem too late. For instance, M&G has informed its investors of a wait time that could extend up to 18 months before they can retrieve all their funds. St. James’s Place is also closely assessing market conditions before deciding on the way forward.